Macroeconomics for Managers

837 Pages·2003·5.523 MB·English

Macroeconomics for managers
Macroeconomics for managers
Michael K. Evans
©2004byMichaelK.Evans
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Firstpublished2004byBlackwellPublishingLtd
LibraryofCongressCataloging-in-PublicationData
Evans,MichaelK.
Macroeconomicsformanagers/MichaelK.Evans.
p.cm.
Includesbibliographicalreferencesandindex.
ISBN1-4051-0144-X(hardcover:alk.paper)–1-4051-0145-8(pbk.:alk.paper)
1.Managerialeconomics.2.Macroeconomics.I.Evans,MichaelK.
HD30.22.E852003
339/.024/68–21
2002156369
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Setin10/121 BookAntiqua
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Contents
PrefaceandAcknowledgments xv
PartI:IntroductoryConcepts 1
Chapter1:TheImportanceofMacroeconomics 3
Introduction 3
1.1 WhatisMacroeconomics? 5
1.2 LinksBetweenMacroeconomicsandMicroeconomics 8
1.3 CurrentCoreofMacroeconomicTheory 10
1.4 Macroeconomics–anEmpiricalDiscipline 11
1.5 TheImportanceofPolicyApplications 13
1.6 PositiveandNormativeEconomics:WhyMacroeconomists
Disagree 14
1.7 RoadmapofthisBook 17
KeyTermsandConcepts 19
Summary 19
QuestionsandProblems 20
Appendix:ThumbnailSketchoftheDevelopmentofMacroeconomics 22
Notes 27
Chapter2:NationalIncomeandProductAccounts(NIPA) 28
Introduction 28
2.1 HowtheNationalIncomeandProductAccountsare
Constructed 28
2.2 ComponentsofGDP:FinalGoodsandServices 30
2.3 DifferencesBetweenFinalandIntermediateGoodsandServices 36
2.4 ComponentsofNationalIncome 37
2.5 BalancingItemsLinkingGDP,NI,PI,andDI 46
vi CONTENTS
2.6 ValueAddedbyStagesofProduction:AnExample 51
2.7 InclusionsandExclusionsintheNIPAData 52
2.8 CircularFlowBetweenAggregateDemandandProduction 56
KeyTermsandConcepts 57
Summary 58
QuestionsandProblems 59
Appendix:KeyMacroeconomicIdentities 62
Notes 63
Chapter3:KeyDataConcepts:Inflation,Unemployment,and
LaborCosts 65
Introduction 65
3.1 MeasuringInflation:ThreeDifferentTypesofIndexes 65
3.2 FactorsCausingtheInflationRatetobeOverstated 68
3.3 CouldtheInflationRatebeUnderstated? 75
3.4 DifferentMeasuresofUnemployment 78
3.5 CollectingtheEmploymentandUnemploymentData 80
3.6 TheConceptofFullEmployment 86
3.7 UnitLaborCosts 91
3.8 SummarizingtheEconomicData:IndexesofLeadingand
CoincidentIndicators 96
3.9 MethodsandFlawsofSeasonallyAdjustedData 97
3.10 PreliminaryandRevisedData 99
KeyTermsandConcepts 100
Summary 100
QuestionsandProblems 101
Notes 104
PartII:AggregateDemandandJointDeterminationofOutputandInterestRates 105
Chapter4:TheConsumptionFunction 107
Introduction 107
4.1 PrincipalDeterminantsofConsumption 108
4.2 Short-TermLinksBetweenConsumptionand
DisposableIncome:TheMarginalPropensitytoConsume 111
4.3 Long-TermLinksBetweenConsumptionandIncome:
ThePermanentIncomeHypothesis 114
4.4 ConsumerSpendingandChangesinTaxRates 115
4.5 ImportanceofCostandAvailabilityofCreditin
theConsumptionFunction 119
4.6 Consumption,HousingPrices,andMortgageRates 122
CONTENTS vii
4.7 OtherLinksBetweenConsumerSpending,theRateofInterest,
andtheRateofReturn 124
4.8 CreditAvailabilityandtheStockofDebt 126
4.9 TheRoleofDemographicFactorsandtheLifeCycleHypothesis 129
4.10 TheRelationshipBetweenConsumptionandHousehold
NetWorth 130
4.11 TheEffectofChangesinConsumerConfidence 135
4.12 Review 137
KeyTermsandConcepts 138
Summary 138
QuestionsandProblems 139
Appendix:HistoricalDevelopmentoftheConsumptionFunction 141
Notes 149
Chapter5:InvestmentandSaving 151
Introduction 151
5.1 TheEquivalenceofInvestmentandSaving 151
5.2 Long-TermDeterminantsofCapitalSpending 153
5.3 TheBasicInvestmentDecision 155
5.4 TheCostofCapital 157
5.5 TheAvailabilityofCredit 159
5.6 TheRoleofExpectations 162
5.7 LagsintheInvestmentFunction 163
5.8 TheEffectofChangesinTaxPolicyonCapitalSpending
Decisions 164
5.9 DeterminantsofExportsandImports 173
5.10 TheRoleofGovernmentSaving 182
5.11 Recap:WhyInvestmentAlwaysEqualsSavingon
anExPostBasis 183
KeyTermsandConcepts 184
Summary 184
QuestionsandProblems 185
Appendix:TheTheoryofOptimalCapitalAccumulation 187
Notes 194
Chapter6:DeterminationofInterestRatesandIntroductionto
MonetaryPolicy 195
Introduction 195
6.1 DefinitionsofKeyInterestRatesandYieldSpreads 197
6.2 TheRoleofMonetaryPolicy 202
6.3 TheFederalReserveSystem 204
6.4 DeterminationoftheFederalFundsRate 206
6.5 EffectofFederalReservePolicyontheAvailabilityofCredit 212
viii CONTENTS
6.6 DeterminantsofLong-TermInterestRates 213
6.7 TheDifferenceBetweenChangesinMonetaryConditionsand
MonetaryPolicy 216
6.8 FactorsCausingtheYieldSpreadtoFluctuate 217
6.9 TransmissionofMonetaryPolicy 221
6.10 TheImportanceoftheYieldSpreadasaPredictiveTool 224
6.11 WhyTargetingInterestRatesDoesn’tAlwaysWork:
TheConundrum 227
KeyTermsandConcepts 228
Summary 229
QuestionsandProblems 230
Notes 232
Chapter7:JointDeterminationofIncomeandInterestRates:
TheIS/LMDiagram 234
Introduction 234
7.1 ReviewoftheEffectofChangesinInterestRatesand
IncomeonSavingandInvestment 235
7.2 EquilibriumintheGoodsMarket 237
7.3 DerivationoftheISCurve 238
7.4 SlopeoftheISCurveunderVaryingEconomicConditions 242
7.5 FactorsthatShifttheISCurve 242
7.6 TheDemandforMoney:LiquidityPreferenceand
LoanableFunds 244
7.7 EquilibriumintheAssetsMarket:DerivationoftheLMCurve 246
7.8 SlopeoftheLMCurveunderVaryingEconomicConditions 247
7.9 TheIS/LMDiagramandIntroductiontoMonetaryand
FiscalPolicy 250
7.10 TheIS/LMDiagraminBoomsandRecessions 252
7.11 FactorsthatShifttheISandLMCurves 253
7.12 ANumericalExample:SolvingforIncomeand
InterestRatesusingtheIS/LMModel 254
KeyTermsandConcepts 262
Summary 262
QuestionsandProblems 263
Notes 266
PartIII:AggregateSupply:Inflation,Unemployment,andProductivity 267
Chapter8:CausesofandCuresforInflation 269
Introduction 269
8.1 IntheLongRun,InflationisaMonetaryPhenomenon 271
CONTENTS ix
8.2 IntheShortRun,InflationisDeterminedby
UnitLaborCosts:ThePriceMarkupEquation 272
8.3 MonetaryPolicyandtheRoleofExpectations 280
8.4 DeterminantsofChangesinUnitLaborCosts 284
8.5 MalignandBenignSupplyShocks 291
8.6 LagsinDeterminingWagesandPrices 295
8.7 TheBeginningsandEndsofHyperinflation 297
8.8 SummaryofWhyInflationRemainedLowin
the1990s–andWhatMightOccurintheFuture 300
KeyTermsandConcepts 304
Summary 304
QuestionsandProblems 305
Appendix:HistoricalExplanationsofInflation:TheRiseand
FallofthePhillipsCurve 307
Notes 314
Chapter9:WhyHighUnemploymentPersists 316
Introduction 316
9.1 TheBasicLaborMarketModel 317
9.2 RealGrowthandUnemployment:Okun’sLaw 322
9.3 WhyStimulatoryMonetaryandFiscalPolicyMightNot
ReduceUnemployment 324
9.4 TheoriesBasedonLaborMarketImperfections:Summary 326
9.5 StickyPricesandNominalWageRates 329
9.6 StickyRealWageRates:EfficiencyWages 332
9.7 StickyRealWageRates:Insider/OutsiderRelationships 334
9.8 BarrierstoMarket-ClearingWages:TheMinimumWage 337
9.9 TheWedgeBetweenPrivateandSocialCostsofLabor 348
9.10 HighUnemploymentRatesandHysteresis 351
9.11 TheStructuralistSchool 352
KeyTermsandConcepts 357
Summary 357
QuestionsandProblems 358
Notes 361
Chapter10:AggregateSupply,theProductionFunction,and
theNeoclassicalGrowthModel 363
Introduction 363
10.1 ProductivityGrowthandtheStandardofLiving 364
10.2 TheLong-TermHistoricalGrowthRecord 368
10.3 TheAggregateProductionFunctionandReturnstoScale 372
10.4 TheCobb-DouglasProductionFunction 373
10.5 WhyGrowthDiffersamongNations:TheImportanceof
SavingandInvestment 374
x CONTENTS
10.6 OtherFactorsAffectingGrowth:TheFrameworkof
GrowthAccounting 376
10.7 CausesofGrowthinthe USEconomy 378
10.8 TheWorldwideSlowdowninProductivityafter1973 381
10.9 TheNeoclassicalGrowthModelandtheSlowdownof
MatureEconomies 387
10.10 EndogenousGrowthTheoryandConvergenceModels 388
10.11 AdditionalImportanceofSavingandInvestment 392
KeyTermsandConcepts 394
Summary 394
QuestionsandProblems 395
Notes 397
PartIV:TheInternationalEconomy 399
Chapter11:BasicDeterminantsofExportsandImports 403
11.1 TheBalanceBetweenCurrentandCapitalAccounts 403
11.2 FixedandFlexibleExchangeRates 408
11.3 USExportsandImports:EmpiricalReview 411
11.4 IncomeandPriceElasticitiesofUSExportsandImports 413
11.5 TheRepercussionEffect 419
11.6 HowSeriousistheBurgeoningTradeDeficit? 421
11.7 RecentProgressTowardFreeTrade 428
11.8 ArgumentsForandAgainstaTradeDeficit 434
11.9 ForeignPurchasesofUSAssets:ANon-Event 437
KeyTermsandConcepts 439
Summary 439
QuestionsandProblems 441
Appendix:TheTheoryofComparativeAdvantageand
theModernTheoryofInternationalTrade 442
Note 444
Chapter12:InternationalFinancialMarketsand
ForeignExchangePolicy 445
Introduction 445
12.1 TheWorldDollarStandardandMajorTrendsin
OtherKeyCurrencies 446
12.2 NominalandRealExchangeRates 452
12.3 MeasuringInternationalLaborCosts 453
12.4 TheConceptofPurchasingPowerParity 455
12.5 FactorsthatDetermineForeignExchangeRates 460
CONTENTS xi
12.6 WhyForeignExchangeMarketsOvershootEquilibrium:
TheJ-CurveEffect 470
12.7 OtherFactorsCausingCurrencyRatesto
DivergefromEquilibrium 475
12.8 ManagedExchangeRates:BandsandCrawlingPegs 477
12.9 OptimalTradeandForeignExchangeRatePolicy 481
KeyTermsandConcepts 483
Summary 483
QuestionsandProblems 484
Notes 486
Chapter13:TheMundell-FlemingModel:JointDeterminationof
Output,InterestRates,NetExports,andtheValueoftheCurrency 487
13.1 LinksBetweenDomesticandInternationalSavingand
Investment 487
13.2 TheBasicModel:JointDeterminationofRealInterestRates,
Output,CurrencyValue,andtheCurrentAccountBalance 489
13.3 TheMundell-FlemingModelforaSmallOpenEconomy 492
13.4 TheRepercussionEffectintheMundell-FlemingModel 494
13.5 TheDepreciationEffectintheMundell-FlemingModel 496
13.6 ShiftsintheNXandNFICurvesCausedby
ChangesinInflationandProductivity 499
13.7 EffectsoftheReaganandClintonFiscalandMonetaryPolicies 500
13.8 EconomicImpactofanExogenousChangeinNetExports 504
13.9 Short-andLong-RunEffectsofanExogenousChangein
theValueoftheCurrency 507
KeyTermsandConcepts 511
Summary 511
QuestionsandProblems 513
Notes 516
Chapter14:CaseStudiesinInternationalTrade 517
Introduction 517
14.1 InternationalTradeintheEuropeanEconomy 517
14.2 InternationalTradeintheAsianEconomy 527
14.3 InternationalTradeinLatinAmerica 539
14.4 ProsandConsofFreeTradeinanImperfectWorld 545
14.5 WhatFactorsWillDetermineWorldLeadersofthe
Twenty-FirstCentury? 551
Summary 554
QuestionsandProblems 555
Note 557